Gensokyo was originally a desolate, haunted region of Japan ages ago. The youkai that lived there began to terrorize the surrounding lands, and thus powerful, heroic humans were sent to exorcise and exterminate them. The off and on battle between humans and youkai continued on until 1884 A.D., when Gensokyo was sealed off from this increasingly scientific and skeptical world with the creation of t
he Hakurei Border. There has been little contact between those societies ever since. Today, the only known gateway between Gensokyo and this world is the Hakurei Shrine, which stands in isolation along the border on distant mountains of the far east. Cage in Lunatic Runagate Chapter 4 reveals that the Youkai Mountain preserves the original appearance of Mount Yatsugatake before Sakuya-hime, the goddess of Mount Fuji, tore it down out of jealousy. In the outside world today, the remnants of the mountain can be seen as the Yatsugatake mountain range in Yatsugatake-Chūshin Kōgen Quasi-National Park between Nagano and Yamanashi Prefectures, providing an indication of where Gensokyo would be located in Japan. Lake Suwa (諏訪湖, Suwa-ko), which Suwako Moriya was named after, is located nearby. http://touhou.wikia.com/wiki/Gensokyo
All original credit, Touhou, Gensokyo, and all intellectual material here in: ZUN
